Starting from August 1, the 2023 Law on Real Estate Business comes into effect. One of the key provisions in this law concerns the competency of investors in real estate projects. Decree No. 96/2024/ND-CP, which details and guides the implementation of certain provisions of the Law on Real Estate Business, has been recently issued by the Government to clarify this matter further. Specifically, Articles 5 and 6 of Decree 96 provide detailed regulations on capital mobilization for project implementation and the equity capital of real estate enterprises.
Specifically, Decree 96 stipulates that the credit debt ratio and debt-to-equity ratio of real estate businesses must meet the following three conditions:
First, it must satisfy the financial safety ratios of the enterprise, comply with the provisions of the law on credit, and adhere to the regulations on corporate bonds.
Second, in cases where a real estate business borrows from credit institutions or issues corporate bonds to implement a real estate project that has been approved by the competent state authority as the investor, the total outstanding loans from credit institutions, outstanding corporate bonds, and equity capital for each project must not exceed 100% of the total investment capital of that project.
Third, the total ratio of outstanding loans from credit institutions and outstanding corporate bonds for project implementation must not exceed four times the equity capital of the enterprise for each real estate project with a land use scale of less than 20 hectares, and must not exceed 5.67 times the equity capital for each real estate project with a land use scale of 20 hectares or more.
Equity capital is based on the results of the financial statements or the results of the audited equity capital item reports conducted during the year. In cases where the enterprise does not have financial statement results or audited equity capital item reports at the time of regulation, the results of the financial statements or audited equity capital item reports from the previous year will be used. For enterprises that have been established and operating for less than 12 months, equity capital is determined based on the contributed charter capital in accordance with legal regulations.
Thus, the new regulations continue to inherit the provisions of the previous Law on Real Estate Business and have further expanded the details concerning the debt-to-equity ratio (D/E Ratio). The imposition of a ceiling on the D/E Ratio is aimed at preventing high financial risks for enterprises, which could impact profitability and solvency, as well as control the level of dependency of enterprises on external borrowing compared to their equity. Additionally, these regulations will help limit the situation where real estate businesses mobilize capital (through credit channels or corporate bond issuance) beyond the prescribed limits and use borrowed funds to invest in other projects or for other purposes, as has occurred in the past.
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